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Climate change fight comes with big trade-offs for central banks, says report

·2-min read
FILE PHOTO: Mountains are seen from the Presena Glacier in Italy

FRANKFURT (Reuters) - Central banks need to fight climate change but all policy options on the table come with costly drawbacks, so action needs to be gradual and cautious, an umbrella group of the world's top central banks and supervisors said on Wednesday.

With climate change posing a growing risk to financial stability, central banks are examining their own role in driving a transformation and policymakers are weighing a range of options involving lending, asset purchases and collateral rules.

But all potential changes either hinder monetary policy effectiveness, increase risk or run into operational feasibility, said the Network for Greening the Financial System, a group whose 89 members include the U.S. Federal Reserve, the European Central Bank and the Bank of Japan.

Because of this complexity, the group has so far failed to reach a consensus for policy action and instead recommends early but gradual and cautious steps, it said in a report.

"The least challenging options to operationalise are the least sophisticated ones in terms of addressing climate related risks," the group said.

"Owing to the heightened uncertainty surrounding the exact timing and magnitude of climate related risks’ materialisation, the optimal policy for many central banks is likely to be to adopt gradual, predictable, precautionary risk protection measures."

Still, it argued that the cost of waiting for more reliable data is outweighed by the need for early action so it called on policymakers to consider using nonfinancial climate-related "norm-based" metrics as a "pragmatic" starting point.

Curtailing the availability of credit to some may have the biggest negative impact on monetary policy effectiveness while tweaking collateral rules could be difficult to carry out operationally. Skewing asset purchases would also run in to difficulty in one these two areas.

"Enhancing the disclosure of climate-relevant data is a policy issue that cuts across many of the potential options, while disclosure requirements may be designed by central banks depending on their respective responsibility within their jurisdiction," the group added.

(Reporting by Balazs Koranyi in Frankfurt; Editing by Matthew Lewis)